Sam's Club's Risky Move Into Small-Business Loans

Sam's Club has struggled to compete with membership-club store leader Costco Wholesale (COST). Now it's busting a move, offering a business service Costco doesn't have -- small-business loans. With 15 percent of Sam's business customers reporting they were turned down for a bank loan in a study done last fall, it's a service that's clearly needed, but one that exposes Sam's Club to some potential problems.

The company's announcement doesn't say how much risk exposure Sam's Club will be jave with the loans, which will range from $5,000 to $25,000. The division of Walmart (WMT) is partnered with Superior Financial Group in making the loans. But if Sam's is exposed at all, remember that in these tough times, loan default rates are high. These are likely high-risk lenders, too -- they've been turned down already for bank loans.

Another risk factor: Superior isn't a bank.

Instead, it is one of only 13 federally licensed "nonbank" lenders approved to make loans guaranteed by the Small Business Administration. Last year Superior reported that due to the bank-lending slump, it had emerged as the top lender of SBA-backed small business loans. So the good news is Superior has deep small-business lending experience.

But even if Sam's Club is deriving its income from the loan agreement purely from referral fees, the agreement carries another risk -- bad publicity, which could come from three different directions. One would be if many of its small-business loans go south, which could easily happen given the quality of borrower here.

Another problem: Nonbank lenders don't have a good reputation. Basically, lenders such as Superior are lumped in the minds of many into the same category as payday lenders, currency exchanges and issuers of money orders. Payday lending in particular is a niche rife with abusive practices. Nonbank lenders have been drawing fire for not being subject to financial reforms as have traditional banks, even though some observers feel nonbank lending practices were just as bad in the bubble. Though historically most nonbank lenders were small, local institutions, that's all changed, as Superior's rise to top SBA lender demonstrates, spurring call for better regulation.

Further federal efforts to regulate nonbanks such as Superior could reflect unfavorably on Sam's choice of partner. It's unclear why they couldn't find a bank partner.

One possibility -- and here's the final downside risk -- Sam's may have sought a nonbank partner specifically due to negative flak already circling Walmart over the company's drive to get into banking. Walmart's ongoing efforts to add banking to its resume make many financial-services players nervous. Through Sam's, Walmart is now a small-business lender, and the company already has a stake in a prepaid credit-card company and owns a bank in Canada. Because of the negative flack already surrounding Walmart's banking efforts, Sam's Club has chosen a financial-services partner that may prove less than ideal.

Carol Tice is a longtime business reporter whose work has appeared in Entrepreneur, The Seattle Times, and Nation's Restaurant News, among others. Online sites she's written for include Allbusiness.com and Yahoo!Hotjobs. She blogs about the business of writing at Make a Living Writing.